MEC (Modified Endowment Contract)

A Modified Endowment Contract (MEC) is a life insurance policy that has been funded faster than IRS guidelines allow. Once a policy becomes a MEC, it loses certain tax advantages — specifically, loans and withdrawals become subject to income tax (and potentially a 10% penalty before age 59½).

The MEC classification is based on the "7-pay test" — a policy MECs if cumulative premiums paid in any 7-year period exceed what would be needed to fully fund the policy in 7 equal payments.

For whole life banking:

• MECing a policy is generally undesirable — it eliminates the tax-advantaged access to policy loans
• Banking policies are intentionally structured just below the MEC limit to grow cash value as much as possible without crossing it
• Once a policy MECs, it cannot be reversed

The PUA rider limit is set by the policy design to keep contributions below the MEC threshold. A term rider increases the MEC limit by adding death benefit, creating more room for PUAs.

Related terms: Paid-Up Addition (PUA), Base Premium, Term Rider